Basics of Stock Investing

“Live within your income and save so that you can invest. Learn what you need to learn.” Charlie Munger

So you’ve decided to start buying stocks and are on the lookout for the right way to go about it. I have been investing in stocks since age 16 (I’m 32 now). I am not a stock expert. But all these years of trial and error have fine-tuned my approach to stock investing. The purpose of this article is to list out the tools you need to get started with investing and find your own style of picking stocks.

What are Stocks?

“This is one of the keys to successful investing: focus on the companies, not on the stocks.”

Peter Lynch, Beating the Street

When you buy shares in a company (or stocks), you are buying a piece of the business. You become a part owner of the company. It is important to drill this idea in your mind before starting to invest. This is the core of all stock investing. Depending on the number of shares you buy, you will own a certain percentage of the company. Thinking like a part owner of the business helps in the decision making of whether to buy, hold or sell a stock.

For eg., You buy 100 shares of HDFC Bank. You now own 100 divided by the total shares issued by HDFC Bank. This percentage may seem like a minuscule amount, but you have an equity stake(ownership) in HDFC Bank.

What is the difference between Stocks & Mutual Funds?

Mutual Funds buy stocks and bonds. So when you buy a mutual fund, you are buying a basket of stocks. If you buy stocks, you are choosing the companies in which you become a shareholder.

How are Stocks Traded? What is Sensex?

Stocks can be bought or sold on major stock exchanges such as the Bombay Stock Exchange(BSE) or National Stock Exchange(NSE). This can be done on the phone or online by opening an account with a stockbroker.

Sensex is an index which is a collection of 30 stocks. Its value changes as the price of the stocks in the index change.

Opening a Stock Broking Account

Opening a stockbroking account has never been easier. You can open an account online with the help of basic documentation.

Like opening a bank account, there are tons of options available here as well. And there is no thumb rule here for which is the right one. Go through a few brokerage websites and pick the one which is offering you a low brokerage and you feel comfortable using. After using it for some time, if you are not satisfied with their service, you can always switch. The stocks you buy will be in your name in a demat account. The broker is only the intermediary here. A demat account is an account that holds shares in electronic format.

There are two different kinds of brokerages. Full Service and Discount.

Full Service

Full-service brokers charge a higher brokerage but provide regular research reports and advisory services.

Some of the available options:

Kotak Securities

ICICI Securities

Motilal Oswal

HDFC Securities

Discount

Discount brokerages charge a small flat fee for each trade but generally do not provide add-on services.

Some of the available options:

5Paisa

Zerodha

(See our detailed review of Zerodha here)

Deciding which Stocks to Buy

The only rule while deciding what stock to buy is: Do not believe tips & rumours that you hear from your friend or Whatsapp group. It is best to do your own research and make an informed decision. This will give you the confidence to hold on to a stock even if the price fluctuates a lot. If this seems too daunting a prospect, it’s best to stick to mutual funds.

Full-service brokerages have regular research reports recommending stocks to buy. These come along with a detailed rationale for the investment. Start reading these. Refer to websites like investopedia.com to understand terms that you are not familiar with.

Books on Investing

I can’t stress enough how useful it is to read a few books on the basics of stock picking. These are great for beginners. I read these books 15 years ago but the lessons have stayed with me ever since. Some of my favourites:

Beating the Street-Peter Lynch

One Up on Wall Street-Peter Lynch

The Intelligent Investor-Benjamin Graham

Basic Terminology

There are many terms that you will come across while investing/trading in stocks. Below are the basics to get started and place orders.

Buy/Sell: Whether to buy or sell a stock.

Quantity: The number of shares.

Price: You then have a choice of placing a limit or market order.

Limit: Setting a price limit above which the shares will not be bought. Or while selling, placing a limit below which your shares will not be sold.

Market: Your shares will trade at whatever the available market price is.

(It is best to use the limit order option to be sure of the price you are ready to pay or receive).

Great. You’ve made your first trade. Now it’s time to sit back and be patient.

Holding Period

“The typical big winner in the Lynch portfolio (I continue to pick my share of losers, too!) generally takes three to ten years or more to play out.”

― Peter Lynch, One Up On Wall Street: How To Use What You Already Know To Make Money In

While investing in stocks, it’s important to have a long-term horizon (at least 3 years). For anything lower, it’s better off sticking to a bank FD. The reason for a long-term horizon is that market prices are determined by a host of factors in the short term. These could be interest rates, the government of the day, oil prices etc. But in the longer term what matters is the company’s profits. If you are sure of the reason why you invested in a company in the first place, then you should confidently be able to hold the stock for a long period of time.

Investing in stocks can be of great joy and satisfaction if you keep learning and enjoy each step of the stock picking process.

Also see: (How to buy shares in American companies from India)

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